UK pension protection inadequate, says European court

The European Court of Justice has ruled that the UK's protection for final salary pension scheme members is inadequate. The High Court will now have to decide whether or not the Government is liable for losses for members whose employer becomes insolvent.

Though the ECJ said that a government does not have to provide 100% compensation to members of final salary pension schemes whose firm goes bust, it did say that the 20% some UK members have received is inadequate under European law.

"Provisions of domestic law that may, in certain cases, lead to a guarantee of benefits limited to 20 or 49% of the benefits to which an employee was entitled, that is to say, of less than half of that entitlement, cannot be considered to fall within the definition of the word ‘protect’," said the ECJ ruling.

Two funds exist to compensate pension holders. The Pension Protection Fund (PPF) was created in 2005 and pays out compensation to pension holders in the case of company insolvency, calculating payments according to a formula related to salary. It is funded by compulsory contributions from business.

The Financial Assistance Scheme deals with claims that pre-date the setting up of the PPF, and industry figures claim that it has inadequate funds. It is the more likely of the two funds to be affected by the ruling.

The ECJ case was begun when workers at engineering company Allied Steel and Wire (ASW) took a case to the Court when the firm went into liquidation in 2003. "People will need to be compensated and we are convinced we have a strong case. This is a fantastic result," a spokeswoman for AMICUS, the union which backed the case, told Reuters news agency.

"The court finds that the directive does not oblige the member states themselves to fund the rights to old age benefits," said the ECJ. "The directive cannot be interpreted as demanding a full guarantee of the rights in question. Nevertheless, a level of protection of those rights such as that afforded by the United Kingdom system is inadequate."

"This judgment will embarrass the Government," said Alastair Meeks, a pensions specialist at Pinsent Masons, the law firm behind OUT-LAW.COM. "The Government is currently under attack from all sides for not putting measures in place to protect members of final salary schemes. The Parliamentary Ombudsman has already heavily criticised the Government, and now the European Court of Justice has held that it has been in breach of European law for over 25 years."

If the High Court reaffirms the ECJ's view, levies on businesses could go up, experts warned. "The scope for the PPF to reduce benefits in future may now be limited. Levies may well go up on other pension schemes," said Meeks. "Given the PPF is carrying out a Government obligation, the Government's stance that it will not underwrite its benefits is now looking threadbare."

"Employers will be concerned that the bill for any improved compensation will land on their desks," he said.